Diana Clement: First home buyers are making their mark

It's not a simple process and there are some major things to consider.

The planets are in alignment for first-home buyers. Photo / Getty Images

The planets are in alignment for first-time home buyers. After four years of biding their time, first-home buyers are making their mark in the property market.

What's new is the combination of low interest rates, relaxed lending criteria and KiwiSaver withdrawals and subsidies. There has been a degree of pent-up frustration from those who normally move out of renting to buying.

Thanks to those factors coming together, home buyers have started to go property shopping in greater numbers over the past year, says Kiwibank spokesman Bruce Thompson. It has been more noticeable over the past few months.

Last month, 31 per cent of all buyers through Harcourts nationwide were first-home buyers. "That was up by a few per cent on the previous month," says Hayden Duncan, Harcourts' chief executive.

Buying a first home is the biggest financial decision most people will make in their lives.

It's not a simple process. Suddenly you need to be a building inspector, economist, negotiator and banker all in one.

Lower your expectations

To many young first-home buyers, the house they want to buy is an average-priced home in Grey Lynn. They want the mod cons they have grown up with, such as internal garaging and two bathrooms, says Duncan.

That isn't traditionally the bottom rung of the ladder. First-home buyers in the past moved out to cheaper suburbs or bought a unit in a good suburb.

"There is a fixation with buying a property that they can walk around," says Alistair Helm, a property commentator who runs Properazzi. "That's okay when you are 40. But think about the next three years, not the next 10 years."

There is, however, affordable housing in virtually every corner of New Zealand. Even around Grey Lynn. For example, what's wrong with 2/21 Finch St, Western Springs which, according to QV, sold recently for $350,000? A 5-10 per cent deposit on that isn't out of the reach of buyers who are willing to knuckle down and save from scratch.

Admittedly 2/21 Finch St, Western Springs isn't the most beautiful property ever marketed, although the interior appeared clean and tidy in the photographs on the Anne Duncan Real Estate website.

Or, for the small family that believes it can't afford to live in Remuera, the two-bedroom brick and tile unit at 5/43 Abbotts Way has a current capital value of $345,000. There's a private garden big enough for a trampoline and paddling pool. It's for sale by negotiation through Bayleys.

If you really must have three bedrooms and two bathrooms then try 38/172 McLeod Rd, Te Atatu South, which is on the market for $350,000.The point of all of this is that you or your children don't need to start off in the average home.

Get a bigger deposit

The deposit is a real sticking point when it comes to buying property. Some people just can't save. It is possible to buy with 100 per cent finance again using a Welcome Home Loan or sometimes through a high-street lender. But it's rare, says Geoff Bawden, mortgage broker at Prosper. Most banks want some evidence that you can save before they are willing to lend.

The logic is that if you've saved, you have a vested interest in keeping up payments because you don't want to lose your hard-earned deposit.

People do find ways around this, such as borrowing a chunk of money and keeping it in their account for a number of months.

There is a very good reason to have an even larger deposit than 5 per cent. This is where the bank of Mum and Dad can come in useful.

With a larger deposit, home buyers can avoid the nasty little surprise that is mortgage indemnity insurance. This is an insurance that you take out, but that only protects the lender.

If you default on your mortgage the bank claims on the insurance to get its money back. The insurance company then chases you to recover its losses. The irony is that you pay the premium. The premiums are usually loaded onto the mortgage, which means they cost even more over the life of the mortgage.

If, however, you have at least a 10 per cent deposit, or in many cases 20 per cent, you won't have to pay this insurance.

A larger deposit also means you won't necessarily need to pay for a registered valuation. Lenders need this to ensure that the property they're lending on is actually worth what you or the vendor says it is. If the bank lends $400,000, and it's really only worth $350,000, it may have a problem should the property go to mortgagee sale. A bigger deposit often means you don't need to pay for that valuation, which can cost $500 to $800. I do, however, think that a valuation is a good idea anyway. People can and do pay over the odds for properties, sometimes sweet talked by commission-hungry agents.

Beware of interest rates The elephant in the room for first-time buyers is interest rates. Economists, mortgage brokers and property commentators do not expect rates to rise until 2014. That will come around pretty quickly, however, and if interest rates rise from their present historic low more than a few property owners who have borrowed more than they can pay off could be facing mortgagee sale. "Remember everything is cyclical," says Bawden. "If you are going to buy a property today you need to think what might happen and how you will cope if rates go up."

Get a building inspection

Don't be naive. There are all sorts of dangers lurking beneath those four walls. You may find that there is more work than you think needs doing.

One of the worst things that can happen is you buy a leaky home.

Some owners of these homes face repair bills of tens or hundreds of thousands of dollars. Many have also suffered a drop in capital value thanks to the fact that homes built during the 1990s in particular are stigmatised.

Read the council file

Most people get a LIM (land information memorandum) through their local council when they buy a property. It's a good idea to go a step further and pay to view the council file on the property. The LIM and file can reveal a lot about a property. It might, for example, be at flood risk. Or it could have been used as a P-lab. There may also be unpermitted works that have to be ripped out when the council discovers them.

Look for ways to make money from your property

First-home buyers might want to let a bedroom to a paying flatmate to help ease the cost of a mortgage.

Even better is to buy a "home and income" property. Usually this is a house with a flat attached or converted garage.

Beware, however, real estate agents are not always straightforward about these properties.

They may be referred to as "possible home and income", or a "granny flat" or "sleepout". What that means is they are almost certainly not legal. If you try to let them to paying tenants you could run into trouble with the council, Tenancy Tribunal or other authorities.

Another way to make money from a property is to buy a do-up and do the work yourself, or buy a property that can have more rooms added. That may be by changing the existing layout, converting an internal garage to a room, or possibly building a cost-effective extension.

Beware, however, building works are renowned for costing far more than expected.

Read a book or three

Plenty has been written on how to buy your first home.

My advice is to head to the local library and pick up a book on the subject of home buying. Two such books are The Streetwise Home Buyer by Stephen Hart and The School of Home Truths by Martin Hawes. There are also good online guides such as Kiwibank's Your First Home guide, which can be found at tinyurl.com/KiwibankFirstHome.

Diana Clement is a freelance journalist who writes about personal finance and careers. She has worked as a journalist for more than 25 years in both New Zealand and the UK. Diana has contributed to a large number of local and international publications. Her pet topic is the secrets of saving money.